Is a ‘mortgage repayment holiday’ right for you?

You might have heard a bit of talk lately about mortgage holidays.

As part of its response to COVID-19, the Government has been working with lenders to make it easier for borrowers to get a break from their home loan repayments.

While ‘mortgage repayment holidays’ have always been an option for borrowers experiencing financial hardship, in this time of economic insecurity, many lenders have been focusing on making the application process more efficient.

Terms and conditions vary from lender to lender, of course, and we are here to advise you on what your lender requires. But in the meantime, if you’re considering this solution, here are some key things to think about before you jump in.

A ‘mortgage holiday’ can help…

When times get tough, there’s nothing quite so important as cash flow. If yours is getting tight, taking a major payment out of your budget for now could be the relief you need to power through to the other side of the downturn.

For many people, a home loan repayment is their most significant commitment, so a mortgage holiday is a good way to quickly free up a chunk of income each month.

You can then keep on top of all your other bills without sliding into expensive consumer loans or credit card debt, which can be hard to get out of, or funnel more cash into your business if you need to.

… but your interest will continue to accrue

When opting for a ‘mortgage repayment holiday’, you’re taking a break from your repayments – but not from the mortgage itself.

All the time you’re not paying your normal repayments, the interest you owe ticks up in the background. For example, a six-month repayment holiday would add about $15,000 to the cost of a loan for someone with a 25-year $500,000 mortgage at 4 per cent, or about an extra $72 a month once payments began again.

If you didn’t increase your repayments after the holiday and just extended the term of your loan, you may end up paying an extra $35,000 over a 30-year term.

So, what other options might you have?

The answer to this question depends on your lender, and what type of support they’re offering. Many, for example, allow eligible customers to switch to an interest-only mortgage for a while.

If your lender provides this opportunity, and if (despite financial hardship) you can afford to pay the interest portion of your repayment, interest-only may be the most appropriate strategy for you right now. While you won’t pay the principal down during that time, at least you won’t owe any more at the end of the interest-only period than you did at the start.

Interest-only repayments are smaller than the regular principal + interest payments. How much smaller depends on how early in your loan term you are: for example, if you’ve only just started paying your mortgage off, you may find that most of your repayment is already interest, anyway – so it might not provide significant relief.

What about low interest rates?

As you’ll have heard, most lenders have reduced their mortgage rates following the Reserve Bank’s decision to cut the official cash rate (OCR) in March 2020. So if you’re due to refix, or can take advantage of a lower floating rate, you may be able to save some money. Also, if your budget allows it, you might be in a position to pay off your mortgage faster – by keeping your repayments at the same level or making lump-sum payments.

Get in contact with us

Like to discuss this further? We’re here to help you work out the best options to get you through this uncertain period. Give us a call today.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.